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Entertainment Conglomerates Gear up for Quarterly Earnings Reports

Cable TV advertising growth and mixed film unit trends are expected to be key themes.

NEW YORK - Quarterly earnings season for Hollywood biggies kicks into high gear this week, with CBS Corp.'s latest financial report on Tuesday starting the parade of results.

Once again, cable TV advertising growth and mixed film unit trends are expected to be key trends seen across entertainment conglomerates.

"Based on our checks, we believe that national TV ad growth on cable and broadcast networks lived up to healthy expectations for the June quarter," said Lazard Capital Markets analyst Barton Crockett in a recent earnings preview. "Local TV stations suffered modest hits from car production constraints. But this was mild, immaterial to conglomerates, and already baked into outlooks and models."

Meanwhile, film results look like a mixed bag. "Most studios experienced a positive quarter at the box office, while home video continued to suffer due in part to difficult comparisons as well as an underperforming release slate," Nomura analyst Michael Nathanson said.

Among key earnings conference call themes, Wall Street will also look for latest executive comments on how sector giants want to use their ample amounts of cash - with hopes for further dividend payments and stock buybacks, which are on track for banner years of spending.

Plus, any color on how the ad market and rest of the business is doing will also be key for investors and analysts. After all, a strong stock performance of the entertainment sector during the first half of 2011, observers wonder how much upside there is to Hollywood conglomerate stocks - and how well the business will perform in the coming quarters.

"With the recent outperformance of media stocks relative to the market, valuation is less compelling," said Credit Suisse analyst Spencer Wang. "We still see signs that underpin our secular concerns, which continue to give us pause. These include declining TV penetration and TV viewership among adults 18-49, essentially zero growth in pay TV subs, and early signs of cord-cutting - particularly among younger demos."

On a more positive note, Nathanson said in a recent report that it is "too early to worry over [a] pause in advertising strength" even though "over the past quarter, the broader market has become concerned about the future economic prospects of the world at large and the U.S. in particular."

And Crockett echoed: "We also believe that September quarter trends are holding firm."

He continues to like entertainment stocks in general. "We see [the entertainment group] gaining more share of consumer spend," he said. "We particularly like TV networks, which we see benefiting from rising leverage for program fees from traditional and Internet distributors, secular rotation of ad dollars to cable program networks, and secular international growth."

Here is a look at what to expect from the entertainment conglomerates in their earnings reports:

CBS Corp.

After Sony Corp.'s quarterly earnings report a few days ago, Sumner Redstone-controlled CBS Corp. opens the earnings parade for U.S. sector giants after the market close on Tuesday.

Nathanson projects the company to have "the most upside" over Wall Street consensus estimates out of its sector biggie peer group. He recently raised his earnings forecast "led by double-digit growth at the entertainment segment as the Netflix deal begins to hit the financials" as he wrote in a report.

Plus, a boost in the profitability of CBS coverage of the NCAA men's basketball tournament and lower film losses will also help as will radio growth.

His projection calls for a 38 percent gain in operating profit to $798 million.

Time Warner

Wednesday morning, TW will report its second-quarter results as will cable operator Comcast, which will share the first full quarter of financials for NBCUniversal since it acquired a majority stake in the entertainment company.

For TW, Wang projects unchanged operating profit of $1.2 billion with a 7 percent gain at the TV networks unit, but a 28 percent film decline to $125 million due to what he called "the underwhelming performance" of Green Lantern and "the better than expected performance of The Hangover Part II."

Davenport & Co. analyst Michael Morris forecasts 7 percent growth in operating profit on an 8 percent revenue gain, including 12 percent ad revenue growth. "Higher costs for the NCAA contract and the HBO Go launch were well communicated drags on profit growth," said Morris. "Strong performance of the Harry Potter 7 part one DVD, the potential for a larger than expected buyback and positive comments into a stronger second half are biggest potential upside surprises."

Cable network ratings weakness remains his biggest concern. "Despite significant investments in the past year in sports and original programming ratings have continued to decline at TBS and TNT in particular," Morris said.

Viacom

Sumner Redstone-controlled Viacom will present its quarterly figures on Friday.

Wang expects a 57 percent decline in film operating profit to $30 million, but he has raised his film unit operating profit estimate "to reflect better than expected profitability of the film slate," which included Super 8, Thor and DreamWorks Animation's Kung Fu Panda 2. But tough year-ago comparisons - when Paramount released Iron Man 2 and Shrek Forever After - and marketing spending on the June 29 release of the latest Transformers blockbuster will affect results.

Next week Tuesday, Wall Street will be anticipating the latest financials and guidance from the largest entertainment conglomerate by market value.

Heading into earnings season, Wang called Disney "the most controversial name in our universe," which he rates at "outperform," due to concerns about the theme parks unit's cyclical recovery, among other things.

"However, our work suggests [quarterly] results should more demonstrably show park operating leverage as several of the one-time factors that obscured margin improvement in [the previous quarter] should reverse," Wang argued. "Looking beyond [the latest quarter], assuming a stable economy, we continue to expect a pricing led recovery at the parks."

Meanwhile, Crockett bumped up his Disney earnings estimates more than those of its peers "driven by a refinement of our take on ESPN affiliate fee timing swings and updates for actual movie performance."

Wang expects operating profit edged up 2.9 percent in the quarter for Disney amid strong gains in the theme parks and broadcasting businesses, a slight film improvement of 2.8 percent and a cable networks decline.

His estimate for ESPN ad growth stands at 5 percent. And in the film unit, Wang says Pirates of the Caribbean 4 and Cars 2 had a tough year-ago comparison due to Toy Story 3 and Iron Man 2, but the year-ago period also included a $70 million-plus writedown related to The Sorcerer's Apprentice and Prince of Persia.

News Corp.

On Wednesday, Aug. 10, Rupert Murdoch's News Corp. will wrap up the earnings season for entertainment giants.

But the actual earnings could pale in comparison to Wall Street's interest in the body language of chairman and CEO Murdoch and his president, COO and deputy chairman Chase Carey, who various observers have said could eventually take over the CEO title, amid the continuing phone hacking scandal and any comments on its possible further fallout.

"This quarter is forecast to see the fastest quarterly operating income growth at News Corp. of the past fiscal year due to the easing of the tough Avatar [comparisons]," Nathanson said. "However, given all the recent events around News of the World, BSkyB and the recent $5 billion buyback announcement, these results will likely take a back seat for investor focus on the earnings call."

When it comes to quarterly financials, Nathanson forecasts a 46 percent gain in operating
profit.

Wang sees operating profit rise 41.5 percent to $1.3 billion, including a doubling in the broadcast TV unit to $230 million and a film improvement from $137 million to $219 million. He predicts "sustained strength at the cable networks and better film comparisons, partially offset by sluggish local television and publishing" results and losses for just-sold social network MySpace.

In the film unit, the performance of Rio, X-Men: First Class and Mr. Popper's Penguins will compare well with the year-ago releases Date Night, Marmaduke and The A-Team, but the home video lineup was weaker with the likes of Chronicles of Narnia: Dawn Trader and Gulliver's Travels going up against the year-earlier results from Alvin & the Chipmunks 2 and Avatar.